Mortgage Loans Guide

The definition of a mortgage loan:

A mortgage loan is a type of secured loan, which means that you require a collateral (the property you’re hoping to get a loan for) secured against the loan in order for the bank to lend the money to you. However, the margin of finance from the bank varies, and is seldom the full value of your property. If you fail to repay your monthly mortgage, your property may be repossessed by the bank to be auctioned off.

The definition of margin of finance:

The margin of finance (MOF) is the loan amount granted by the lender (the bank), which is expressed as a percentage of the value of the property pledged as collateral to secure the mortgage loan. The amount financed depends on several factors such as the value of your property, your income, and your ability to repay the loan.

Types of mortgage loans:

– Standard home loans

These loans come with either fixed or variable interest rates, and you pay back the amount loaned to you plus interest every month over an agreed period. Both types of interest are calculated based on the Base Rate (BR) set by Bank Negara.

– Flexi home loans

In principle, they are similar to standard home loans, except that you can make payments in advance, leading to savings on interest because you can pay off your loan sooner. Flexi home loans are a good option for those who both want to polish off their loan and build emergency funds at the same time. This is because your loan account is typically linked to a current account, which will not only help you to keep track of advance payments, but also give you the option of withdrawing the advanced amount when necessary.

– Islamic home loans

Islamic teachings disallow the concept of profiting from interest charged on the loaned amount – known as ‘riba’ – so Islamic home loans operate on a shared ownership system in which the bank purchases the property and shares ownership with the borrower until the borrower successfully pays off the loan and thus receives full ownership of the property. The profit rate the bank is allowed to earn is calculated based on the Base Rate (BR) set by Bank Negara.

Lending considerations:

Banks will approve or reject your application for a mortgage loan based on several criteria, such as your age, income, salary or profit, credit history, previous loan repayment history, and loan-to-value ratio. Typically in Malaysia, to be eligible for a mortgage loan, you will have to be at least 18 or 21 years old; however, depending on the loan, you need not be a Malaysian in order to qualify for the loan.

Borrowing considerations:

Before you formally apply for any mortgage loans, it is prudent to evaluate your financial stability and projected finances so that you’ll have the ability to repay the loan comfortably for the next few decades. You’ll also have to consider the type of loans, the interest rates they incur, miscellaneous fees such as processing fees, penalty fees, and early settlement fees (if any), loan tenure, and the possibility of remortgaging your property. You may also want to look into the starting capital you have at hand to be used as downpayment for your property, because that affects your loan-to-value ratio.

The importance of loan-to-value ratio:

The loan-to-value ratio shows the level of equity in the property of both borrower and lender. The loan refers to the amount loaned, while the value refers to the appraised value of the property. Having a bigger downpayment ready means you’ll apply for a smaller loan amount against the appraised value of the property, lowering your loan-to-value ratio. While many lenders offer up to 90% margin of finance, a small loan-to-value ratio will make it much more easier for you to successfully apply for a mortgage loan from the bank.

For example, if you’re aiming to buy a RM100,000 house, and you need to borrow RM70,000 from the bank to purchase it, you’re looking at a loan-to-value ratio of 70%, which is lower than the advertised 90% MOF.

How interest rate is calculated:

Previously, Islamic banks calculate profit based on Base Profit Rate (BFR), while non-Islamic banks calculate interest rates based on Base Lending Rate (BLR), but now a uniform Base Rate (BR) is used by major Malaysian banks as a reference interest rate to determine the amount to charge for a product offered to the consumer. If BR increases, interest rates increase by the same amount, and vice versa. Borrowers looking to take out loans with variable interest rates will be constantly affected by changes in BR.

If a loan advertises a ‘BR – 0.20%’ rate and the current BR rate is 4.50%, the interest rate on that loan will be 4.50%-0.20% = 4.30%.

Documents to prepare:

Documents will include, but not necessarily be confined to, the following:

– A fully filled application form

– A copy of both sides of your MyKad

– A Copy of the Sales and Purchase Agreement, or Booking Receipt

– A Copy of the individual title deed

– A property valuation report (where applicable, for completed properties)

-Latest salary slips

– Latest EPF statements

– Latest bank statements

– Letter of confirmation of employment and remuneration (if you’re an employee)

Any Further Questions?

If you’d like to know more about personal loans, head over to our personal loans FAQ right here for more information.

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